Regulation Fair Disclosure

A. Understanding Regulation Fair Disclosure

• What is Regulation Fair Disclosure (“Regulation FD”)?
• Why did the SEC adopt Regulation FD?
• What do critics of Regulation FD say?
• Does Regulation FD change how companies provide disclosure?
• How should companies comply with Regulation FD?
• How does Regulation FD impact how analysts do their jobs?
• How has Regulation FD changed how companies communicate with analysts?
• Which companies are subject to Regulation FD?
• Does Regulation FD apply to foreign companies that file reports with the SEC?
• Which employees at a company are directly responsible for complying with Regulation FD?
• Should companies specifically identify which employees are authorized to make disclosures or field inquiries?
• Should companies specifically require unauthorized employees who receive inquiries to make referrals to authorized employees?
• Who is exempt from Regulation FD?

B. What is "Material" and "Nonpublic" Information under Regulation FD

• What information is "material" for Regulation FD purposes?
• What matters are likely to be considered "material" for Regulation FD purposes?
• Is a company presumed to acknowledge that the information is material if it uses Form 8-K as a dissemination method?
• How does the Securities and Exchange Commission Staff Accounting Bulletin No. 99 impact a "materiality" analysis under Regulation FD?
• Why should companies worry about undertaking "materiality" analyses?
• What is the "mosaic theory"?
• Is information considered material under Regulation FD if it is insignificant by itself but material to an analyst or other market participant (i.e. it fills in the last piece of a "material" puzzle)?
• How can a company determine whether information is "material"?
• How should companies prepare to make a materiality evaluation?
• What types of employees typically make up a disclosure team?
• Under what standard should materiality judgments be evaluated?
• What should companies do if they make a mistake about the materiality of a disclosure?
• Can a company discuss earnings privately without the information being considered "material"?
• Is information material if it significantly impacts a company's stock price?
• What types of information are nonpublic for Regulation FD purposes?

C. Private Conversations under Regulation FD

• What is "selective disclosure"?
• Why should companies avoid "selective disclosure"?
• What are the risks of management talking privately with analysts?
• Can companies privately speak with analysts without triggering a "selective disclosure" violation?
• Why is it difficult for companies to refrain from providing "selective disclosure" to analysts?
• What should a company do if it discovers that a senior officer had a private conversation with an analyst?
• With whom can a company not privately discuss material nonpublic information?
• Under Regulation FD, with whom can a company privately discuss material nonpublic information?
• What are the risks when a company privately talks to persons that are not covered by Regulation FD?
• Can a company talk with employees without worrying about violating Regulation FD?
• Does Regulation FD prohibit companies from privately disclosing confidential information to their investment bankers?
• Does Regulation FD prohibit companies from privately disclosing confidential information to potential merger partners?
• How does Regulation FD impact what is disclosed about a pending merger or business combination?
• Does Regulation FD prohibit companies from privately disclosing confidential information to their venture capitalists?
• What types of "investment advisers" are subject to Regulation FD?
• When is it reasonably foreseeable that a company's securities holders will trade on information provided to them?
• Does Regulation FD prohibit companies from privately disclosing confidential information to their suppliers or customers?
• Can companies tell analysts about an upcoming merger before it is publicly announced?
• When should a company have another person enter into a confidentiality agreement?
• Does a confidentiality agreement have to be in writing for Regulation FD purposes?
• What is an "express" agreement to keep information confidential?
• Does a person agreeing to keep information confidential also need to agree not to trade on that information?
• Does a person agreeing not to violate the federal securities laws become a person to whom material nonpublic communications can be made?
• Can a company have a person enter into a confidentiality agreement after it unintentionally provides material nonpublic information?
• Can companies provide disclosure to journalists as a way to comply with Regulation FD?
• How should companies handle interviews with journalists?
• How can a company “embargo” information?

D. Dissemination of Disclosure under Regulation FD

• How can a company ensure that material nonpublic information that it wants to disclose is publicly available as required under Regulation FD?
• What is "broad non-exclusionary distribution"?
• What does the Securities and Exchange Commission recommend that companies do to make material nonpublic information publicly available?
• How can companies broadly disseminate information in a press release?
• Are companies required to disseminate information through a particular method?
• What is the difference between "filing" a Form 8-K under Item 5 and "furnishing" one under Item 9?
• Should companies use a Form 8-K to publicly disseminate material information?
• Can companies comply with Regulation FD by filing a document with the SEC other than a Form 8-K?
• Can a company comply with Regulation FD by filing a Form 8-K to announce that its disclosures will be made on its Web site?
• Can a company meet its disclosure obligations by only posting information on its Web site?
• How are companies meeting their disclosure obligations by posting information on their Web sites?
• When may the SEC allow companies to comply with Regulation FD by posting disclosure on the Web?
• How do the Self-Regulatory Organization (“SRO”) regulations impact Web site dissemination?
• When must a company make its disclosure public?
• What is "intentional" disclosure?
• When should a company consider disclosure to be intentional?
• What is "simultaneous" disclosure?
• What is "non-intentional" disclosure?
• What is the difference between "intentional" and "non-intentional" disclosures?
• What is the process of determining whether a company's inadvertent disclosure is "material"?
• How soon does a company have to publicly disseminate the substance of a non-intentional disclosure?
• Does Regulation FD require companies to widely disclose their material developments as they occur?
• What types of limited access settings are there?
• How should companies make presentations in limited access settings?
• Should companies change their behavior at investor conferences due to Regulation FD?
• Should companies change their behavior due to Regulation FD if analysts come for an on-site visit?
• Can a company provide information at its stockholders' meeting and consider it broadly disseminated?
• Can a company provide information in its annual report and consider it broadly disseminated?

E. Conducting Offerings under Regulation FD

• How does Regulation FD impact a company conducting a public offering?
• When does a registered underwritten offering begin for Regulation FD purposes?
• When does a registered non-underwritten offering begin and end for Regulation FD purposes?
• How does Regulation FD impact a company conducting a private or offshore offering?
• What happens to a company if each offeree does not expressly agree to keep the material nonpublic information in a private placement confidential?
• How should companies draft their private placement memoranda under Regulation FD?
• How can companies make disclosure in their periodic filings with the SEC to serve as a repository of Regulation FD disclosure?
• What can companies disclose during road shows for private placements?
• Why might offerees in a private placement refuse to expressly agree to keep material nonpublic information confidential?
• Can companies get offerees in unregistered offerings to execute confidentiality agreements?
• Should investment bankers - acting as private placement agents - change their behavior during private placements due to Regulation FD?
• What do critics of the application of Regulation FD to unregistered offerings say?
• How does Regulation FD impact a company involved in a registered merger or acquisition?
• How does Regulation FD impact a company that has an ongoing shelf registration offering?

F. Consequences of Violating Regulation FD

• What are the consequences of violating Regulation FD?
• What are the potential adverse consequences of complying with Regulation FD?
• What does a violation of Regulation FD not do to companies?
• Can a company's independent auditor report a Regulation FD violation that it uncovers during an audit?
• Can a private lawsuit be brought against a company that violated Regulation FD?
• Can employees be personally liable for Regulation FD violations?
• How can the SEC enforce Regulation FD?
• How is the SEC likely to enforce Regulation FD?

A. Understanding Regulation Fair Disclosure

What is Regulation Fair Disclosure (“Regulation FD”)?

Regulation FD regulates how companies provide disclosure to the market, and it is designed to create a level playing field for all investors. It was enacted primarily because the Securities and Exchange Commission wanted to stop the practice of companies disclosing material information to the market primarily through analysts.

Regulation FD prohibits a public company from intentionally disclosing material nonpublic information to specified types of market participants and the company's securities holders, unless the company broadly discloses the information simultaneously. See more @ What is "intentional" disclosure?

If a company non-intentionally discloses material nonpublic information to those persons, the company must broadly disclose the information promptly. See more @ What is "non-intentional" disclosure?

Regulation FD is not meant to change anything about the substance of disclosure itself, but it may indirectly impact the types of information that companies voluntarily decide to disclose, when to disclose particular information, and how to disclose it. See more @ Does Regulation FD require companies to widely disclose their material developments as they occur?

Regulation FD is a fundamental change in the SEC's approach to selective disclosure. Before Regulation FD was adopted, the SEC relied on Rule 10b-5 to bring selective disclosure enforcement cases. Now, companies engaging in selective disclosure practices also violate a disclosure regulation. In other words, Regulation FD is a disclosure regulation, not an insider trading provision. See more @ What are the consequences of violating Regulation FD?

Source: Regulation FD . The SEC adopted Regulation FD in Release No. 33-7881 (Aug. 15, 2000).

Why did the SEC adopt Regulation FD?

The SEC adopted Regulation FD to protect investors. The SEC’s primary concern was that selective disclosure, and the perception of selective disclosure, leads to a loss of investor confidence in the integrity and fairness of the market. The SEC was also concerned about rumored instances of companies using material information to curry favor with analysts.

In adopting Regulation FD, the SEC recognized that the Internet's communication capabilities diminish the need for companies to privately share information with analysts to obtain an efficient market. Now, companies can broadly distribute information inexpensively on the Web, thereby making it easier for companies to broadly disseminate information to the public. See more @ Webcast and Telephonic Conference Call Practices in Realcorporatelawyer.com’s FAQs on Analyst Communications.

Regulation FD is controversial. Some critics note that there is scarce evidence that selective disclosure actually occurs other than in isolated circumstances.

Source: The SEC made its case for adopting Regulation FD in Section II.A.2 of Release No. 33-7881 (Aug. 15, 2000). Regulation FD was supported by the vast majority of a record volume of comment letters (over 6,000), most of which were sent by e-mail from retail investors.

What do critics of Regulation FD say?

Criticism of Regulation FD includes:

• Regulation FD discourages companies from making quality disclosure. In other words, it has a "chilling" effect;
• In certain circumstances, Regulation FD may result in too much disclosure, thereby forcing investors to weed out material information from more marginal information;
• The ambiguous legal standards surrounding Regulation FD impose too much risk on companies; there is insufficient protection for the forward-looking information it fosters; and there is insufficient guidance about "materiality";
• The legal standards require disclosure in circumstances that conflict with existing law, particularly in the offering context;
• It eliminates the role of analysts as a filter of public information; and
• It contributes to stock volatility. See more @ What do critics of the application of Regulation FD to unregistered offerings say?

Source: The SEC acknowledged some of these problems in Section II.A.2 of Release No. 33-7881 (Aug. 15, 2000). Although the vast majority of a record volume of comment letters supported Regulation FD, most in the corporate community urged further modification or complete resistance to it when it was proposed.

How does Regulation FD change how companies provide disclosure?

Regulation FD significantly impacts how companies communicate with analysts, and with all other market participants, fostering more communication with journalists, employees, customers, and suppliers. Regulation FD also changes the way companies disseminate information, such that their communications may be more superficial and less informative because Regulation FD requires companies to cater to average investors “who may be unfamiliar with Wall Street jargon.” Marissa P. Viccaro, Can Regulation Fair Disclosure Survive the Aftermath of Enron?, 40 Duq. L. Rev. 695, 700-701 (2002).

Although i ssuers are making more public disclosures, the quality of those disclosures may be compromised. At the same time, issuers are conducting fewer investor conferences or one-on-one meetings with analysts. Regulation FD does not change the law regarding general duties to disclose because, absent special circumstances, companies still can control when they want to make a disclosure.

Source: For a discussion of various Regulation FD Surveys, see ABA Committee on Federal Regulation of Securities Report on Regulation FD .

How should companies comply with Regulation FD?

There is not a "one size fits all" compliance program for all publicly traded companies. Companies have different policies, each with different levels of risk. The SEC recognized that this flexibility is essential because each company has its own unique processes for creating, analyzing, and distributing disclosure. See more @ What is the process of determining whether a company's inadvertent disclosure is "material"? .

However, because standard practices in some areas are developing, additional guidance from the SEC staff likely will drive companies to modify their practices over time. See more @ Webcast and Telephonic Conference Call Practices in Realcorporatelawyer.com’s FAQs on Analyst Communications.

How does Regulation FD impact how analysts do their jobs?

Analysts need to conduct more analysis on their own and focus more on the long-term prospects of a company. They can no longer be “spoon-fed” earnings information or financial models from Chief Financial Officers or Investor Relations Directors.

For the most part, analysts have been cut off from private conversations regarding earnings with some companies, but some companies may still provide “one on one” access to clarify a statement that was made to the general public.

Over time, it is possible that analyst reports may become more meaningful because Regulation FD forces analysts to do more independent research. On the other hand, analysts may become less relevant if retail investors use the information that companies publicly provide to make their investment decisions.

How has Regulation FD changed how companies communicate with analysts?

In general, companies are communicating less directly with analysts regarding earnings. However, many companies still regularly communicate with analysts on other topics to help fill the "mosaic". See more @ What is the "mosaic theory"?

The following list describes how companies have changed their methods of communicating with analysts as a result of Regulation FD. In general, companies:

• open their conference calls to the public and do not limit them to just analysts;
• provide more detail in their calls, including more forward-looking information, but also provide less original content than what was mentioned in related press releases;
• participate in fewer investor conferences and hold fewer sidebars with analysts during the conferences;
• have longer and more frequent blackout periods;
• participate in fewer one-on-one meetings or phone calls to discuss earnings;
• do not privately reaffirm analysts’ prior earnings guidance or the company's prior guidance;
• institute formal disclosure policies; and
• include information about how to access the Webcast or conference call in earnings releases.

Source: For more information on the reaction of companies in response to Regulation FD, see Todd R. David, et al., A Report on Regulation FD – How the SEC Is Interpreting It and How Public Companies are Responding (Mar. 2001); see also Realcorporatelawyer.com’s FAQs on Analyst Communications.

Which companies are subject to Regulation FD?

Public companies that file periodic reports with the SEC are subject to Regulation FD, with the exception of foreign companies. See more @ Does Regulation FD apply to foreign companies that file reports with the SEC?

If a company has securities registered under Sections 12 or 15 of the Securities Exchange Act of 1934, it must comply with Regulation FD. Therefore, Regulation FD applies to companies that either have securities traded on a stock exchange or NASDAQ, or have registered a public offering with the SEC in the past twelve (12) months.

Regulation FD does not apply to initial public offerings or to communications made by companies in connection with most registered offerings. See more @ How does Regulation FD impact a company conducting a public offering?

Regulation FD applies to closed-end investment companies that have reporting obligations with the SEC, but it does not apply to open-end funds or other types of investment companies.

Source: Rule 101(b) of Regulation FD describes which companies are subject to the regulation. In Section II.B(5) of Release No. 33-7881 (Aug. 15, 2000), the SEC described which companies are subject to Regulation FD.

Does Regulation FD apply to foreign companies that file reports with the SEC?

The SEC noted that SRO regulations may require foreign private issuers listed on U.S. exchanges to make timely disclosure of material information, and has implicitly urged the SRO's to enforce these regulations.

The SEC originally proposed to make foreign private issuers subject to Regulation FD, but then decided to exclude them and reconsider this exclusion when it proposes changes to the special disclosure framework applicable to foreign issuers.

F oreign companies that do not file reports with the SEC are not subject to the U.S. securities laws that require disclosure. Only U.S. anti-fraud rules apply to them.

Source: In footnote 75 of Release No. 33-7881 (Aug. 15, 2000), the SEC asked its Division of Corporation Finance to review the disclosure framework for foreign private issuers.  

Which employees at a company are directly responsible for complying with Regulation FD?

Not all employees are directly responsible for complying with Regulation FD. The SEC has enumerated categories of "senior officials" intended to cover the types of employees that regularly communicate with market participants (i.e., investors, analysts, and journalists) regardless of seniority or title. These categories are:

• directors and executive officers;
• persons performing investor relations or public relations functions; and
• employees and agents who regularly communicate with market professionals and security holders.

No other employees are directly impacted by Regulation FD unless acting at the direction of a "senior official." However, it is possible that leaks of information by these non-covered employees may violate company policy or other laws. See more @ Should companies specifically require unauthorized employees who receive inquiries to make referrals to authorized employees?

Perhaps the biggest challenge for companies is educating their executive officers and directors who normally do not speak publicly on behalf of their companies because their communications are subject to Regulation FD. The application of Regulation FD to these persons can be avoided through the use of corporate policies. See more @ Analyst Communication Policies in Realcorporatelawyer.com’s FAQs on Analyst Communications.

The SEC originally proposed to subject any person who spoke on behalf of a company to Regulation FD, but then decided to limit the Regulation's scope in response to criticism that such a broad application would have a "chilling effect" on the ability of employees to conduct ordinary business.

Source: Rule 101(c) of Regulation FD defines a person acting "on behalf" of the issuer as (1) any "senior official" of the issuer; or (2) any other officer, employee or agent of an issuer who regularly communicates with (a) broker/dealers and their associated persons; (b) investment advisers, institutional investment managers, hedge funds, and their associated persons; (c) investment companies and their affiliated persons; or (d) any holder of the issuer's securities, under circumstances in which it is reasonably foreseeable that the holder will purchase or sell the issuer's securities on the basis of the information.

Rule 101(f) defines "senior official" as any director, executive officer, investor relations or public relations officer, or other person with similar functions .

In Section II.B(1)(b) of Release No. 33-7881 (Aug. 15, 2000), the SEC discusses which persons are authorized to act on a company's behalf. In footnote 36 of that release, the SEC identified the types of employees whose job typically consists of regular communication with market participants.

Should companies specifically identify which employees are authorized to make disclosures or field inquiries?

Companies should specifically identify, in writing, which employees are authorized to make disclosures or field inquiries. The SEC does not require companies to identify spokespersons, but has acknowledged that this formal identification effectively resolves any uncertainty regarding who is covered by Regulation FD.

Ideally, the number of employees identified should be as small as possible. Companies should prohibit non-designated employees from engaging in discussions with persons outside the company and instruct employees to refer inquiries to authorized spokespersons.

A company is not liable under Regulation FD if a spokesperson discloses material nonpublic information in breach of its duty of trust or confidence. Therefore, a company is not responsible when one of its employees improperly trades or tips. The spokesperson, however, could be liable for insider trading. See more @ Selective Disclosure under Rule 10b-5 in Realcorporatelawyer.com’s FAQs on Analyst Communications.

Source: In footnote 44 of Release No. 33-7881 (Aug. 15, 2000), the SEC urged companies to identify their spokespersons. In footnote 37 and accompanying text of that release, the SEC noted that companies are not responsible if their employees improperly trade or tip.

Should companies specifically require unauthorized employees who receive inquiries to make referrals to authorized employees?

Companies should specifically require unauthorized employees who receive inquires to make referrals to authorized spokespersons. Companies can protect themselves by specifically requiring referrals and prohibiting unauthorized employees from communicating with analysts in a written company policy.

By covering these matters in a corporate policy, companies can gain leverage to take action against employees for infractions and help educate employees. More importantly, such measures bolster the argument that the company is not liable under Regulation FD for communications by these employees.

Source: In footnote 44 of Release No. 33-7881 (Aug. 15, 2000), the SEC urged companies to identify their spokespersons. In footnote 37 and accompanying text of that release, the SEC noted that companies are not responsible if their employees improperly trade or tip.

Who is exempt from Regulation FD?

Regulation FD exempts four types of communications. The first two exemptions are communications made to a person who owes the issuer a duty of trust or confidence (i.e., a temporary insider such as an attorney, investment banker, or accountant), and a person who expressly signs a confidentiality agreement. See more @ When should a company have another person enter into a confidentiality agreement? Regulation FD also exempts communications to businesses whose primary business is issuing credit ratings that are made publicly available. Finally, communications made in connection with most offerings of securities registered under the Securities Act are also exempt. See more @ How does Regulation FD impact a company conducting a public offering?

Source: Rule 100(b)(2)(i) , 100(b)(2)(iii) , and 101(g)(1).

B. What is "Material" and "Nonpublic" Information under Regulation FD

What information is "material" for Regulation FD purposes?

Although Regulation FD does not provide a definition of materiality, the SEC uses the same definition of materiality under Regulation FD that it applies in fraud actions. Information is "material" if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision, or if that information would have significantly altered the total mix of information made available. A facts and circumstances test is applied to determine materiality. Materiality is determined from the perspective of the "reasonable investor"—not the actual recipient.

In one of the first Regulation FD actions, the SEC found selective disclosures material for the following reasons, among other things:

• the disclosures involved earnings guidance;
• the CFO of the company reached out to analysts individually; and
• as a result, the analysts lowered their first quarter guidance and then communicated their lowered estimates to their sales forces.

In re Raytheon Co. and Franklyn A. Caine , Release No. 34-46897 (Nov. 25, 2002). Therefore, any disclosures that cause analysts to change their published earnings estimates may be regarded as conclusive evidence of the materiality of the disclosed information.

The process of how "materiality" is determined under Staff Accounting Bulletin No. 99 is also useful in the Regulation FD context. The SEC has not stated that SAB No. 99 does not apply to Regulation FD standards. See more @ How does the Securities and Exchange Commission Staff Accounting Bulletin No. 99 impact a "materiality" analysis under Regulation FD? .

Companies should also consider the probable reaction by investors when the information is disclosed because something is more likely to be judged material in hindsight if it significantly impacts a company's stock price. See more @ Is information material if it significantly impacts a company's stock price?

Source: In Section II.B(2) of Release No. 33-7881 (Aug. 15, 2000), the SEC discusses materiality and cited the following seminal "materiality" cases: TSC Industries, Inc. v. Northway, Inc., U.S. 438 (1976) and Basic v. Levinson, 485 U.S. 224 (1988).

What matters are likely to be considered "material" for Regulation FD purposes?

In the Regulation FD adopting release, the SEC provided a list of matters that it believes are typically "material," including information relating to:

• earnings;
• mergers, acquisitions, tender offers, joint ventures, or changes in assets;
• new products or discoveries, or developments regarding customers or suppliers;
• changes in control or management;
• change in auditor or notice from an auditor that the issuer can no longer rely on the audit report;
• events regarding the issuer's securities (defaults, calls for redemption, repurchase plans, stock splits, changes in dividends, changes of rights of security holders, public or private sales of additional securities); and
• bankruptcies or receiverships.

Even if a matter is not on this list, companies should be prepared to support an immateriality determination when any of the items cited is involved. While the list is not exhaustive, these categories of information may help in analyzing whether other types of disclosure are material. See more @ How can a company determine whether information is "material"?

Source: In Section II(B)(2) of Release No. 33-7881 (Aug. 15, 2000), the SEC noted that items on this list normally would be considered "material." The list is noteworthy because the SEC has long resisted requests to identify situations that are likely to be deemed material. The SEC made this concession for Regulation FD, recognizing that it would be difficult for companies to make quick materiality judgments under the relatively obscure facts and circumstances definition of materiality.

Is a company presumed to acknowledge that the information is material if it uses Form 8-K as a dissemination method?

Regulation FD explicitly provides that either filing or furnishing information on Form 8-K is not an admission that the information is material. However, the information still may be deemed material.

Companies historically have disclosed information on Form 8-K if there was any debate about materiality. Therefore, if a company uses a Form 8-K, this usually means that the information disclosed is considered more material than information solely issued by press release.

Source: In Section II.B.4(a) of Release No. 33-7881 (Aug. 15, 2000), the SEC acknowledged the concerns of commentators that Form 8-K use could be considered a materiality admission and noted that it would not make this presumption.

How does the Securities and Exchange Commission Staff Accounting Bulletin No. 99 impact a "materiality" analysis under Regulation FD?

In SAB No. 99, the SEC provides guidance in applying materiality thresholds to the preparation of financial statements filed with the SEC and the performance of audits of those financial statements.

In the Regulation FD adopting release, the SEC cited SAB No. 99 in a footnote regarding materiality without further explanation. Therefore, it is unclear whether the SEC intended to extend the scope of SAB No. 99 beyond financial statements.

Source: Among other matters, SAB No. 99 made clear that materiality is not tied to a bright line percentage, such as a 5% rule. SAB No. 99 is referenced only in footnote 38 of Release No. 33-7881 (Aug. 15, 2000), but it is referenced along with the U.S. Supreme Court cases that have long interpreted and defined materiality in the Rule 10b-5 context. In Ganino v. Citizens Utility Co., 228 F.3d 154 (2d Cir. 2000), the Second Circuit applied SAB No. 99 and found that it was not inconsistent with existing law in finding that the inclusion of 1.7% of fees in revenue was material.

Why should companies worry about undertaking "materiality" analyses?

Courts and the SEC have long wrestled with the definition of materiality in antifraud cases brought under the securities laws. Since the determination of materiality is evaluated in hindsight, companies worry about being second-guessed by the SEC or the plaintiff's bar. See more @ Is information material if it significantly impacts a company's stock price?

Determining "materiality" probably is the most challenging aspect of interpreting and applying Regulation FD. In fact, in Section II.B.2 of Release No. 33-7881, the SEC provided a list of disclosures that it believes typically are material to ease this difficulty.

What is the "mosaic theory"?

Companies may selectively disclose information that is immaterial to a reasonable investor but that may be significant to an analyst who uses the information, together with other information, to complete a "mosaic" of information that is material itself. The mosaic theory highlights the fact that what counts is whether the information is material to a "reasonable investor," not whether it is material to a more knowledgeable person like an analyst.

C ompanies are not liable under Regulation FD for providing immaterial information that leads to a mosaic as long as they did not know that they were helping to complete the mosaic.

Source: In Section II(B)(2) of R elease No. 33-7881 (Aug. 15, 2000), the SEC discussed the mosaic theory. In Elkind v. Liggett & Myers, Inc., 635 F.2d 156 (2d Cir. 1980), a court first articulated the "mosaic" theory. This theory was similar to the "pieces of a jigsaw puzzle" analogy used in SEC v. Bausch & Lomb, Inc., 420 F. Supp. 1226 (S.D.N.Y. 1976).

Is information considered material under Regulation FD if it is insignificant by itself but material to an analyst or other market participant (i.e. it fills in the last piece of a "material" puzzle)?

In theory, information is not considered material under Regulation FD if it is insignificant by itself but material to an analyst or other market participant. The SEC has stated that a company is not prohibited from disclosing immaterial information to an analyst even if that information helps the analyst complete a "mosaic" of information that is material. See more @ What is the "mosaic theory”?

In reality, it is difficult in most circumstances to argue that information by itself is immaterial if the information in the aggregate is material. This illustrates how difficult materiality analyses can be.

Interestingly, the SEC stated that a company would not be liable for providing immaterial information as long as it did not know that this information is part of the mosaic. This "unknown to the company" concept is new to the mosaic theory, and it is unknown if this new condition would stand up in court since existing case law does not recognize this concept.

A company likely would be liable if it knowingly separated material information into immaterial pieces and privately funneled some of the pieces of information to an analyst (along with directions on how to obtain the other pieces). In other words, companies cannot devise schemes to take advantage of the mosaic theory "loophole."

The mosaic theory highlights that what counts is whether the information is material to a "reasonable investor," not whether it is material to a more knowledgeable person like an analyst.

Source: In Telephone Interpretation No. 7 of the Fourth Supplement of the Manual of Publicly Available Telephone Interpretations , the SEC staff stated that providing "seemingly inconsequential" data that helps an analyst form a mosaic is not a violation of Regulation FD. This further clarified what the SEC stated about the mosaic theory in Section II(B)(2) of Release No. 33-7881 (Aug. 15, 2000).

How can a company determine whether information is "material"?

Materiality judgments are fact-specific and there is no bright-line standard or list of items that can define materiality in all cases. However, the SEC now has provided a list of matters that it believes are likely to be "material."

Based on the SEC's guidance, companies should assume that any matter listed in Section II.B.2 of Release No. 33-7781 is material unless they can demonstrate with compelling evidence that it is not. Earnings-related information should always be presumed material. For example, guidance as to future results is considered material, as well as any information relating to missing or meeting earnings expectations (unless it is a private reaffirmation of a recent public statement). See more @ Dealing with Earnings Estimates in Realcorporatelawyer.com’s FAQs on Analyst Communications .

Unfortunately, companies find that many situations are hard to evaluate. These gray areas continue to be a bone of contention for many commentators.

If a company finds it difficult to evaluate whether a particular piece of information is material, it is wise to be more cautious and not disclose the information until it becomes more evident how most companies treat similar types of information. See more @ How can a company determine whether information is "material"? Conferring with legal counsel can also show that the company was not reckless, but if counsel believes that the information is material and the company chooses to disclose it, then such a decision may be evidence of recklessness. More importantly, the SEC cautioned that relying on the advice of in-house counsel is not likely to be a valid defense. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Motorola, Inc., Release No. 34-46898 (Nov. 25, 2002).

Source: In Section II.B(2) of Release No. 33-7881 (Aug. 15, 2000), the SEC stressed that private conversations regarding earnings carried a "high degree of risk." See more @ Can a company discuss earnings privately without the information being considered “material”?

How should companies prepare to make a materiality evaluation?

To make materiality judgments on the immediate basis that Regulation FD requires, the disclosure team (consisting of those employees responsible for making these determinations) should be fully knowledgeable about:

• the company;
• its prior public statements;
• what analysts have said about the company;
• what journalists have said about the company;
• what analysts and journalists have said about the company's industry and competitors; and
• what Regulation FD requires.

The disclosure team should also track the trends of how companies are treating differing types of disclosures and monitor how different types of disclosures impact the company's stock price (as a factor to consider in future "materiality" determinations). See more @ Is information material if it significantly impacts a company's stock price?

The disclosure team should also maintain comprehensive binders of all corporate communications—ranging from press releases to SEC filings—as a reference tool to determine what information has been made public.

Finally, the disclosure team should designate someone to regularly send e-mail alerts (perhaps daily for larger companies, less frequently for smaller companies) to the team with a bullet list of new matters that have been broadly released.

What types of employees typically make up a disclosure team?

Most companies rely on a combination of their legal, investor relations, corporate communications, and finance departments to manage their disclosure process. For more information regarding the implications of relying on the advice of in-house counsel, see more @ How can a company determine whether information is “material”?

In many cases, different departments handle different types of disclosures. For example, legal or finance departments typically are responsible for SEC filings, while the investor relations or corporate communications departments are responsible for press releases. Under Regulation FD, these processes may be integrated more often and with more coordinated layers of review.

Under what standard should materiality judgments be evaluated?

Materiality judgments are evaluated under a high standard, which is whether the judgment made was reckless.

The SEC did not define "reckless" in Regulation FD. Instead, the SEC relied on the definition from fraud case law, which defines reckless as an "extreme departure from the standards of ordinary care."

As a result, companies that act in good faith to comply with Regulation FD are unlikely to be considered reckless. Under this standard, employees have some protection that they will not be second-guessed by the SEC for mistaken judgments in close cases. However, the SEC noted that repeated poor materiality judgments make it more likely that a particular disclosure was reckless.

The SEC stated that the reasonableness of a materiality judgment is evaluated considering the relevant facts and circumstances. In other words, a materiality judgment that might be reckless in a prepared written statement may not be reckless as an impromptu answer to an unanticipated question. In some cases, the analysis of whether there was an extreme departure from ordinary care may be determined by whether someone was consulted.

The SEC's use of the reckless standard for Regulation FD, a disclosure regulation, is significant because the SEC ordinarily brings line-item disclosure cases based on allegations of mere negligence; the SEC normally relies on the higher reckless standard for fraud actions.

Source: Rule 101(a) uses a reckless standard in determining whether there is an intentional disclosure. In Section II.B(2) of Release No. 33-7881 (Aug. 15, 2000), the SEC discusses how it decided that a reckless standard was appropriate and cited Hollinger v. Titan Capital Corp. 914 F.2d 1564 (9th Cir. 1990) for the definition. The SEC also stated that liability for mistaken materiality judgments "will arise only if no reasonable person under the circumstances would have made the same determination." In footnote 56 and the accompanying text of Section II.B(2) of Release No. 33-7881, the SEC acknowledged that courts would likely find companies to not be reckless if they took good faith efforts to comply with Regulation FD.

What should companies do if they make a mistake about the materiality of a disclosure?

If a company makes a disclosure that it believes is immaterial, but the market reaction then suggests otherwise because the stock price moves significantly, the company should consider promptly issuing a press release as if it was a non-intentional disclosure and ensure that it has documented the reasons why it originally decided the information was immaterial.

However, even if an issuer that has made a non-intentional disclosure issues a press release as soon as possible in order to remedy the situation, the issuer may still be in violation of Regulation FD if, on a second occasion, it unknowingly disclosed the same material information to a different covered person under the belief that the press release was already issued. See In re Siebel Sys., Inc., Release No. 34-46896 (Nov. 25, 2002).

Can a company discuss earnings privately without the information being considered "material"?

A company cannot discuss earnings privately without the information being considered “material.” In fact, Regulation FD was enacted primarily to stop this practice.

The SEC came close to stating that discussions with analysts regarding earnings are always material by stating that a senior official "takes on a high degree of risk" by privately discussing earnings estimates. See more @ What are the risks of management talking privately with analysts? Most likely, the SEC's statement extends to private earnings discussions with anyone who does not have a duty to remain silent.

A person authorized to speak for a company likely violates Regulation FD if he or she privately informs an analyst that anticipated earnings will be higher, lower, or even the same as predicted, regardless of whether the information is conveyed explicitly or implicitly (e.g., obvious body language or speaking in code). See In re Schering-Plough Corp. and Richard J. Kogan, Release No. 34-48461 (Sept. 9, 2003).

Recently, the SEC demonstrated that it would not hesitate to bring actions against companies that privately corrected publicly disclosed information by speaking directly to analysts or by urging analysts to correct their projections. The only exception is a private reaffirmation that the company believes its estimates are the same just after a public statement to that effect. See more @ Dealing with Earnings Estimates in Realcorporatelawyer.com’s FAQs on Analyst Communications . However, the SEC has also stated that “[a]fter-the-fact private communications of material, nonpublic information to securities professionals are not a proper way to supplement a prior public disclosure that the issuer determines to have been misunderstood or misinterpreted.” Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Motorola, Inc., Release No. 34-46898 (Nov. 25, 2002).

Source: In Section II.B(2) of Release No. 33-7881 (Aug. 15, 2000), the SEC stressed that private conversations regarding earnings carried a "high degree of risk." The recent SEC actions are In re Raytheon Co. and Franklyn A. Caine , Release No. 34-46897 (Nov. 25, 2002); Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Motorola, Inc., Release No. 34-46898 (Nov. 25, 2002).

Is information material if it significantly impacts a company's stock price?

Information is more likely than not material if it significantly impacts a company’s stock price. Even though the legal definition of "materiality" does not account for stock price movement, such movement is one of the easiest gauges to apply regarding how investors truly felt about the information.

Regulation FD's definition of materiality is tied to what a reasonable investor would consider important in making an investment decision. The problem is that it is impossible to know how a stock price will be impacted, or how the market will react to information that a company reasonably believes is immaterial.

The SEC briefly addressed stock price movements in its SAB No. 99 discussion on materiality. "Market moving" issues have concerned many commentators. See more @ How does the Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 99 impact a "materiality" analysis under Regulation FD?

Source: In footnotes 16-17 and accompanying text of SAB No. 99 , the SEC staff noted that stock price movements by themselves should not determine materiality, but stated that the expected market reaction could play some role in this determination.

What types of information are nonpublic for Regulation FD purposes?

If the information has not been disseminated in a manner making it available to investors generally, then the information is nonpublic for Regulation FD purposes. Case law defines nonpublic information similarly, but the SEC staff appears to have narrowed this case law definition for disseminations made on Form 8-K.

Under case law, the markets must have a reasonable period of time to digest any material information that is broadly disseminated before the information will be considered "public." What is a "reasonable" period of time depends on the circumstances of the dissemination (e.g., a few hours for a widely followed company and a few days for a company that cannot get the major wire services to carry its press release).

However, if a company is using Form 8-K as its dissemination method, it only needs to file or furnish it before disclosure can be made for Regulation FD purposes. A company only has to confirm that the Form 8-K was accepted by EDGAR before making the disclosure. There is no requirement to wait until the company believes that the information in the Form 8-K has been broadly disseminated in the market.

Information is not considered public if the company was not the source of the information or if it is unclear whether someone from the company was the source. For example, a media report that cites unnamed sources from the company probably is insufficient for the information to be considered to originate with the company.

Source: In footnote 40 and accompanying text of Release No. 33-7881 (Aug. 15, 2000), the SEC discusses when information is nonpublic. In Telephone Interpretation No. 6 of the Fourth Supplement of the Manual of Publicly Available Telephone Interpretations , the SEC staff clarified that a Form 8-K needs to be confirmed as filed or furnished before it makes disclosure to a limited audience for Regulation FD purposes.

C. Private Conversations under Regulation FD

What is "selective disclosure"?

Selective disclosure occurs when companies provide material information to one or more persons and not to a broad public audience.

There are a variety of ways that a company could provide selective disclosure, such as:

• one-on-one meetings or telephone discussions;
• investor conferences, typically hosted by buy-side analysts;
• analyst conference calls with limited participation; and
• road shows for an offering or for a news update.

Selective disclosure may result in a disclosure violation under Regulation FD and/or an insider trading violation under Rule 10b-5.

Why should companies avoid "selective disclosure"?

Providing selective disclosure may violate Regulation FD and Rule 10b-5 of the Securities and Exchange Act.

Regulation FD prohibits any non-privileged communication of material information to enumerated types of persons, absent simultaneous broad dissemination of the information to the market (or prompt dissemination if the communication was non-intentional). See more @ What is the difference between "intentional" and "non-intentional" disclosures?

If an insider provides "selective disclosure" and receives a personal benefit, that insider can be liable for insider trading. See more @ Selective Disclosure Under Rule 10b-5 in Realcorporatelawyer.com’s FAQs on Analyst Communications .

In addition, the NYSE and NASDR require that a listed company promptly broadly disseminate information that reasonably might be expected to materially affect the market for its securities.

What are the risks of management talking privately with analysts?

There are fairly significant risks when management talks privately with analysts. The perception of what occurred in a private conversation can lead to a SEC enforcement action or private lawsuit over alleged selective disclosure.

Even if management did not provide material, nonpublic information in a private conversation, an analyst may very well revise its recommendation about the company after the conversation because analysts typically speak with management when they are considering changing their recommendation. Thus, to an outside observer, it may appear that selective disclosure was provided even if the conversation ultimately had no bearing on the analyst’s recommendation.

Private conversations are under intense scrutiny after Regulation FD. For example, the SEC stated that management takes on a "high risk" when speaking privately to an analyst regarding earnings estimates. See more @ Dealing with Earnings Estimates in Realcorporatelawyer.com’s FAQs on Analyst Communications.

However, the SEC also stated that companies still can have private conversations with analysts over immaterial matters even if the immaterial matter happens to be the last piece in a puzzle so that the analyst comprehends a material development for the company. See more @ Can companies privately speak with analysts without triggering a "selective disclosure" violation?

Clearly, the intentional disclosure of material nonpublic information in private conversations is a violation of Regulation FD. If any material nonpublic information is non-intentionally disclosed, it also may be a violation if the company does not publicly disclose that information promptly. See more @ What is the difference between "intentional" and "non-intentional" disclosures?

The SEC can bring actions even for implied guidance, such as speaking in "code" or using body language (including tone, emphasis, and demeanor) to communicate. "Code" is slang or language for which both management and the analyst understand the true meaning of the words. The SEC has stated that it finds equally “troubling” the fact that an issuer communicated to the public general terms such as “significant” but then privately described to analysts a “more, detailed quantitative definition of the code word “significant.” Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Motorola, Inc., Release No. 34-46898 (Nov. 25, 2002); see also SEC v. Schering-Plough Corp., Litig. Rel. No. 18330 (Sept. 9, 2003) (emphasizing comments and conclusions of analysts regarding a CEO’s “downbeat” demeanor and lack of confidence portrayed at a private meeting).

Source: In Section II.B(7) of Release No. 33-7881 (Aug. 15, 2000), the SEC made it clear that only its staff can bring actions for a violation of Regulation FD; Rule 102 excludes Rule 10b-5 liability if a case is based solely on selective disclosure. The SEC stated that private analyst conversations about earnings estimates entail a high level of risk in Section II.B(2) of Release No. 33-7881(Aug. 15, 2000). The SEC's former Director of the Division of Enforcement, Dick Walker, noted that he wanted to bring an action based on "code" in a speech on November 1, 2000.

Can companies privately speak with analysts without triggering a "selective disclosure" violation?

Companies can speak privately with analysts without triggering a “selective disclosure” violation. However, it is very important not to talk about any material nonpublic information in order to avoid violating Regulation FD. See more @ What information is "material" for Regulation FD purposes?

The SEC has clarified that companies still can have private conversations with analysts over immaterial matters even if the immaterial matter happens to be the last piece in a puzzle so that the analyst comprehends a material development for the company. However, it is quite risky for employees to talk privately with analysts about any aspect of earnings estimates or other items that the SEC has stated often are material. See more @ Dealing with Earnings Estimates in Realcorporatelawyer.com’s FAQs on Analyst Communications .

Companies can try to protect themselves by making broad disclosure of topics that they anticipate analysts will ask about in private, even if the public disclosure is not at the level of detail discussed with analysts. As long as these details are not material in themselves, companies can relatively safely "drill down" into these publicly disclosed areas during private conversations under the mosaic theory. See more @ What is the "mosaic theory"?

Also, before engaging in any one-on-one meetings with analysts, companies should consider taking the following steps: (1) thoroughly review what has been disclosed previously; (2) review potential questions and the law of materiality; and (3) determine questions that may or may not be answered. Moreover, companies should be prepared to state which areas should not be discussed since such subject matters have not yet been previously disclosed.

Source: In Section II.B(2) of Release No. 33-7881 (Aug. 15, 2000), the SEC clarified that private analyst conversations about immaterial matters can still occur. For more information about avoiding Regulation FD liability, see Todd R. David & Oni A. Holley, “Regulation FD: What the SEC’s Recent Enforcement Actions Teach About Avoiding Liability,” J. of Investment Compliance at 29 (Winter 2003) .

Why is it difficult for companies to refrain from providing "selective disclosure" to analysts?

An important part of any senior manager's job is to communicate with analysts, and relationships with analysts are critical to ensure that a company gets analyst coverage. (Analyst coverage can impact how the stock performs in the market.) Until Regulation FD, analysts were able to exert their influence to get access to detailed information from companies that others could not obtain.

Perhaps the best illustration of how companies historically have communicated with analysts is the number and extent of changes in analyst communication practices after Regulation FD was adopted. See more @ What Companies Should and Should Not Say on Conference Calls in Realcorporatelawyer.com’s FAQs on Analyst Communications.

What should a company do if it discovers that a senior officer had a private conversation with an analyst?

If a company discovers that a senior officer had a private conversation with an analyst, it may be wise to document what was discussed by the officer and prepare a public release of any material nonpublic information that the officer inadvertently told the analyst. See more @ What is the process of determining whether a company's inadvertent disclosure is "material"?

With whom can a company not privately discuss material nonpublic information?

Regulation FD only applies to communications with four categories of individuals. The SEC selected these categories as the types of people that would be reasonably expected to trade on the information received.

The four categories are:

• broker-dealers (but not in their capacity as investment banker (see more @ Does Regulation FD prohibit companies from privately disclosing confidential information to their investment bankers?);
• investment advisers and certain institutional investment managers (see more @ What types of "investment advisers" are subject to Regulation FD?);
• investment companies; and
• holders of the company's securities, only to the extent it is reasonably foreseeable that such persons will trade on the information (see more @ When is it reasonably foreseeable that a company's securities holders will trade on information provided to them?).

In the case of the first three categories, affiliated persons also are covered parties.

Source: Rule 100(b)(1) of Regulation FD identifies these four categories.

Under Regulation FD, with whom can a company privately discuss material nonpublic information?

To ensure that companies can conduct ordinary-course communications with third parties, Regulation FD expressly does not apply to communications with four categories of persons:

• temporary insiders, which are persons that owe a duty of trust or confidence to the company, such as attorneys, accountants, or investment bankers (see more @ Does Regulation FD prohibit companies from privately disclosing confidential information to their investment bankers?);
• any person who "expressly" agrees to maintain the information in confidence - such as the media, customers, or suppliers (see more @ What is an "express" agreement to keep information confidential?);
• any rating agency, as long as the information is disclosed solely for the purpose of developing a credit rating that is then made publicly available; and
• communications in connection with a registered public offering, other than certain continuous "shelf" offerings (see more @ Conducting Offerings under Regulation FD ).

There are risks of communicating with these persons because information can be leaked or otherwise shared in a manner that violates Regulation FD. See more @ What are the risks when a company privately talks to persons that are not covered by Regulation FD?

Companies can communicate with their own employees without violating Regulation FD. See more @ Can a company talk with employees without worrying about violating Regulation FD?

Source: Rule 100(b)(2) of Regulation FD identifies these four categories.

What are the risks when a company privately talks to persons that are not covered by Regulation FD?

When a company privately talks to persons that are not covered by Regulation FD, the risks are mostly related to breaches of a fiduciary or a contractual duty to keep information confidential.

It is difficult to get institutional investors, who do not owe a company a fiduciary duty, to execute confidentiality agreements because they may not be willing to keep the information confidential or they may not want to incur liability if confidential information is accidentally disclosed.

Can a company talk with employees without worrying about violating Regulation FD?

Regulation FD does not apply to communications of material nonpublic information by a company to its employees, even if these employees are stockholders.

As a practical matter, companies often limit the disclosure of confidential information to employees on a "need to know" basis. Not only does this help ensure that competitors do not receive this information, it also reduces the risk that employees will be tempted to break the law or accidentally break the law. Breaches of an employee's duty of trust to an employer can result in a variety of claims, such as violations of trade secrets or insider trading (if they trade or tip).

Source: The SEC emphasized that Rule 100(b)(1) applies only to disclosures made to "any person outside the issuer" in Telephone Interpretation No. 13 of the Fourth Supplement of the Manual of Publicly Available Telephone Interpretations .

Does Regulation FD prohibit companies from privately disclosing confidential information to their investment bankers?

Regulation FD does not prohibit companies from privately disclosing confidential information to their investment bankers. Information can be provided privately to investment bankers because Regulation FD specifically excludes communications to them as temporary insiders. In addition, investment bankers typically agree to keep the information confidential.

Challenges to this general rule can arise when different employees of an investment bank serve a company in different capacities, such as an investment banker and an analyst. Although Regulation FD does not affect the ability of companies to share confidential information with the investment banking side of a bank, companies should be careful not to share this information with the analyst research side. See more @ What are the risks of management talking privately with analysts?

In confidentiality agreements, a company should try to obtain a representation that the bank has adequate "Chinese walls," that the bank is relying on these Chinese walls to receive the related material nonpublic information, and that the bank will indemnify the company if someone brings a suit against the company for a breach of the walls that led to a Regulation FD violation. If the bank is not relying on its Chinese walls, the agreement should specify the steps the bank is taking to "wall" off the information between bankers and analysts. In addition, if an analyst is brought "over the wall" for an offering, an additional separate agreement should be signed by this particular analyst and another authorized person at the bank.

Source: In footnote 29 of Release No. 33-7881 (Aug. 15, 2000), the SEC expressly acknowledged that if a company provides information to its investment bank, it is not deemed to provide information to the bank's sell-side analysts.

Does Regulation FD prohibit companies from privately disclosing confidential information to potential merger partners?

Regulation FD does not prohibit companies from privately disclosing confidential information to potential merger partners if the potential partner expressly agrees to keep the information confidential.

Companies may want to revise their confidentiality agreements so that the potential partner acknowledges and represents that Regulation FD is another reason to keep the information confidential.

Even though communications relating to Regulation M-A transactions are not subject to Regulation FD, this exception is not available until the commencement of the transaction (which is defined as the first public announcement of the transaction). In other words, companies still need to cover their communications by an express agreement of confidentiality before the public announcement of a merger for Regulation FD purposes.

How does Regulation FD impact what is disclosed about a pending merger or business combination?

The answer to this question depends on whether the transaction is registered on the stock exchange. Transactions that are not registered are typically cash mergers and tender offers, and these transactions are subject to Regulation FD, unlike transactions that are registered on the stock exchange.

This distinction has raised a number of uncertainties regarding proxy and consent solicitations during unregistered transactions. For example, although Regulation M-A provides a safe harbor for material oral communications to analysts or stockholders before a cash tender offer is announced, a company arguably has to provide such information in writing and broadly distribute it under Regulation FD.

Does Regulation FD prohibit companies from privately disclosing confidential information to their venture capitalists?

Regulation FD does not prohibit companies from privately disclosing confidential information to their venture capitalists if the venture capitalists expressly agree to keep the information confidential.

Venture capitalists normally have access to material nonpublic information from their portfolio companies because they have large ownership stakes and board memberships. Even though venture capitalists often are exempt from registering as an investment company and their communications are exempt from Regulation FD in this capacity, their communications are covered by Regulation FD since they hold the company's securities.

Under Regulation FD, a company should obtain an express agreement before sharing information with their venture capitalists because it is unlikely that a company could have a reasonable belief that a venture capitalist would not trade; it is their business to take companies public and sell their holdings. However, venture capitalists may not be willing or able to enter into a confidentiality agreement because they owe fiduciary duties to their own investors. See more @ When is it reasonably foreseeable that a company's securities holders will trade on information provided to them?

Even more complicated is handling venture capitalists that serve as board members of a company. As a director, a venture capitalist has a fiduciary duty of loyalty to the company and is a "senior official" under Regulation FD. Therefore, any confidential information venture capitalists receive should be "walled" from other members of the venture capital firm. Venture capital firms should ensure that they have sufficient internal informational barriers so that they comply with Regulation FD.

Regulation FD does not apply to companies that are private or going public, and therefore, venture capitalists face these issues only if they remain on the board after the company goes public. See more @ Which companies are subject to Regulation FD?

What types of "investment advisers" are subject to Regulation FD?

Most types of investment advisers are subject to Regulation FD. Therefore, companies are prohibited from privately disclosing confidential information with investment advisers in most cases.

Entities excluded from the statutory definition of "investment adviser" probably are not subject to Regulation FD (i.e., banks or bank holding companies). However, these excluded entities may be subject to Regulation FD in their capacity as institutional investment managers. It is unclear whether a bank that is not covered as an institutional investment manager would be covered as a securities holder.

It is likely that unregistered investment advisers are subject to Regulation FD even though they are exempt from registering with the SEC (i.e., advisers with fewer than 15 clients or whose clients are exclusively intrastate or limited to insurance companies or charitable organizations).

It is unclear whether Regulation FD covers publishers of investment newsletters. These publishers are covered by the statutory definition of investment adviser but they are not required to register as investment advisers.

Source: Rule 100(a)(ii) of Regulation FD includes investment advisers as covered persons. Since Lowe v. SEC , 472 U.S. 181 (1985), the SEC has not required investment newsletter publishers to register as investment advisers.

When is it reasonably foreseeable that a company's securities holders will trade on information provided to them?

To establish a Regulation FD violation, the SEC must show that “under the circumstances” it was reasonably foreseeable that covered persons would trade securities on the basis of the privately disclosed information. Again, this is a facts and circumstance test. Examples of situations in which it is reasonably foreseeable that information would be used is when one of the largest institutional holders of a company’s stock is invited to an invitation-only investor conference, or when an issuer invites an investor known to be considering trading stock in the near future. See In re Siebel Sys., Inc., Release No. 34-46896 (Nov. 25, 2002) .

It is risky to assume that a securities holder will not trade unless a company can obtain some evidentiary support for its belief. The most obvious solution is for companies to have a securities holder enter into a confidentiality agreement.

Source: Rule 100(b)(1)(iv) of Regulation FD sets forth the "reasonable foreseeability" standard. In footnote 27 of Release No. 33-7881 (Aug. 15, 2000), the SEC noted that companies ordinarily could presume that customers, suppliers, strategic partners, journalists or regulators who are securities holders would not trade based on the information provided, in part due to the risk of insider trading liability.

Does Regulation FD prohibit companies from privately disclosing confidential information to their suppliers or customers?

Regulation FD does not prohibit companies from privately disclosing confidential information to their suppliers or customers if the supplier or customer expressly agrees to keep the information confidential.

Since the SEC requires an express agreement, companies should obtain a blanket agreement from a customer or supplier that, as part of their relationship, all shared information with all of their employees and agents should remain confidential. Then, each time confidential information is shared, the communication is covered by an express agreement.

The SEC acknowledges that companies can ordinarily presume that employees of customers or suppliers will not trade based on the confidential information provided to them even if such employees are securities holders. If a customer's or supplier's employee does trade, then that employee may be liable for insider trading under the misappropriation theory, but this trade is not a violation of Regulation FD by the company.

However, this presumption is for ordinary-course communications only. Therefore, if a communication clearly is material and nonpublic, a company should protect itself by having that particular employee of the customer or supplier who is hearing the information enter into a confidentiality agreement on behalf of such employee and the customer or supplier.

Source: In footnote 27 of Release No. 33-7881 (Aug. 15, 2000), the SEC noted that companies ordinarily could presume that employees of customers or suppliers who are securities holders would not trade based on the information provided.

Can companies tell analysts about an upcoming merger before it is publicly announced?

Companies can tell analysts about an upcoming merger before it is publicly announced only if the analysts expressly agree to maintain the confidentiality of that information until it is publicly disclosed by the company. See more @ How can a company “embargo” information?

In some circumstances, a company may want to warn the analysts that regularly cover the company about an upcoming transaction to allow them to evaluate it before it is publicly disclosed. This enables the analysts to more accurately and comprehensively publish research and advise investors immediately following the company's public announcement about the transaction.

The SEC stated that embargoes are permissible even though it arguably gives the analyst's firm an advantage over competitors once the information is broadly released. The firm arguably has an advantage because it has had time to evaluate the information and will be able to provide financial advice to its clients (and execute trades for clients) more quickly after the information is publicly released.

Companies should attempt to get this express confidentiality agreement in writing due to the extreme materiality of the information, and also limit the duration of an embargo to a short period of time (several hours) before the announcement to reduce the risk of a leak or if negotiations go sour and a deal is never struck.

However, not all analysts are willing to sign an embargo agreement or to promise to abide by the embargo agreement. Once complying with an embargo has burned an analyst (for example, if a competitor violates the embargo or gets the information through a leak), that analyst is less likely to abide by an agreement the next time around.

Source: In Telephone Interpretation No. 9 of the Fourth Supplement of the Manual of Publicly Available Telephone Interpretations , the SEC staff acknowledged that companies can share material nonpublic information with analysts if they expressly agree to keep it confidential.

When should a company have another person enter into a confidentiality agreement?

Before the company provides material nonpublic information to someone, the company should have that person enter into a confidentiality agreement unless there is an agreement or relationship already in place that covers the sharing of information.

Regulation FD allows companies to freely share sensitive confidential information with anyone who enters into an express agreement to preserve the confidentiality of this information. See more @ Under Regulation FD, with whom can a company privately discuss material nonpublic information?

Does a confidentiality agreement have to be in writing for Regulation FD purposes?

A confidentiality agreement does not have to be in writing in order to be valid under Regulation FD; an "express" oral agreement will suffice.

Of course, a company is better able to prove that another party agreed to keep the information confidential if there is a written document. In addition, a written agreement can better define the scope of permitted uses, which reduces the likelihood of subsequent disputes.

Even if a written agreement is not obtained, companies should create contemporaneous written records of oral agreements to generate some written evidence. The need for written evidence is highlighted by the likelihood that any SEC investigation will include allegations of insider trading by the third party. This means the third party will have a great incentive to deny the existence of a confidentiality agreement.

The SEC has recognized that the ability to use express oral agreements under Regulation FD is important to avoid triggering a premature duty to disclose preliminary merger negotiations, or to allow potential acquirers to ask large shareholders if they will support a contemplated takeover because material nonpublic information often is exchanged before written confidentiality agreements are executed.

What is an "express" agreement to keep information confidential?

In the absence of SEC guidance on the meaning of "express," the definition of an express agreement to keep information confidential probably depends on common law contract principles.

Under common law, the clarity of expression is important to determine whether there was an agreement. In theory, an expression can be accomplished through the language, conduct, and intent of the parties.

Until the SEC or the courts provide more guidance, there will be uncertainty as to what qualifies as an "expression" for Regulation FD purposes.

Does a person agreeing to keep information confidential also need to agree not to trade on that information?

A person agreeing to keep information confidential does not need to agree to refrain from trading on that information. Companies do not need to have their express agreements specifically address trading for Regulation FD purposes. However, an investor who traded on that information likely would violate the insider trading laws under the misappropriation theory.

Source: In Telephone Interpretation No. 10 of the Fourth Supplement of the Manual of Publicly Available Telephone Interpretations , the SEC stated that reliance on the Rule 100(b)(2)(ii) exclusion is not dependent on having a recipient agree not to trade. Informally, the SEC has indicated that it takes a "meeting of the minds." Although somewhat uncertain, this may mean the difference between an investor just reading a private placement memo that has a "confidential" label and one that is sealed in an envelope that states that an investor who breaks the seal agrees to keep the information confidential.

Does a person agreeing not to violate the federal securities laws become a person to whom material nonpublic communications can be made?

Material nonpublic communications cannot be made under Regulation FD simply because the recipient of the information has agreed not to violate the federal securities laws. The SEC staff has stated that the express agreement must specifically address confidentiality.

Companies should consider updating their existing “c onfidentiality agreements” to include more specific language about confidentiality. In the past these agreements typically only contained broad language about not violating the federal securities laws and did not specifically address confidentiality.

Source: In Telephone Interpretation No. 11 of the Fourth Supplement of the Manual of Publicly Available Telephone Interpretations , the SEC staff stated that broad statements about federal securities law violations is not sufficient to rely on the Rule 100(b)(2)(ii) exclusion.

Can a company have a person enter into a confidentiality agreement after it unintentionally provides material nonpublic information?

A company can have a person enter into a confidentiality agreement after it unintentionally provides material nonpublic information, provided there has been no trading or disclosure to a third party.

This is one way to "cure" an inadvertent selective disclosure. Another way is to obtain a confidentiality agreement that also represents that there has not been any trading or subsequent disclosure. However, this can be difficult to obtain since a company may not have leverage with a recipient after information already has been shared.

Source: In footnote 28 of Release No. 33-7881 (Aug. 15, 2000), the SEC noted that companies could obtain express agreements to maintain confidentiality after material nonpublic information was divulged.

Can companies provide disclosure to journalists as a way to comply with Regulation FD?

Most likely, companies cannot provide disclosure to journalists as a way to comply with Regulation FD. However, the SEC staff has stated that it is possible that disclosure to journalists could constitute "broad, non-exclusionary distribution" depending on "when, what and how widely the press reports."

To be safe, a company should not rely on press coverage being considered broad distribution unless it knows the journalist will effect a simultaneous live public broadcast of the presentation for which advance notice has been given. See more @ What is “broad non-exclusionary distribution”?

Otherwise, the SEC has made it quite clear that the mere presence of journalists in a limited-access setting does not exempt the disclosures from Regulation FD, even though the disclosure to the journalists itself is not covered by Regulation FD.

Companies also should consider the risks of real time media presence. For example, if there is an inadvertent slip during a presentation, a company normally wants some time to prepare for the possible difficult questions related to any fallout before it is widely reported on mainstream cable and network broadcast channels.

Note that companies can selectively disclose information to journalists if they get an express agreement to keep the information confidential until it is broadly distributed. See more @ How can a company “embargo” information?

Source: In Telephone Interpretation No. 16 of the Fourth Supplement of the Manual of Publicly Available Telephone Interpretations , the SEC staff stated that media coverage may constitute broad, non-exclusionary distribution if the right circumstances are present.

How should companies handle interviews with journalists?

A company should handle interviews with journalists more carefully than before Regulation FD was adopted. Even though Regulation FD does not apply to disclosures to journalists (meaning that disclosure of material non-public information to journalists does not trigger a company's public disclosure obligation), companies should be careful because:

• once the information is given to journalists, it is outside the company's control as to what the journalist will do with it;
• it can be difficult to distinguish between journalists and market professionals (some media organizations function like market participants);
• during public offerings, antifraud rules and publicity restrictions may restrict a company's ability to provide information to journalists; and
• providing information to journalists before issuing a press release could harm the company's relationships with analysts and institutional investors.

Just like with analysts, companies may want to provide advance information of an unannounced transaction so that a journalist can write an analytical article that would be published concurrently with the public announcement of the transaction. A company should try to obtain an agreement that the journalist will keep the information confidential until the company is ready for public release.

How can a company "embargo" information?

A company can embargo information by providing the nonpublic information to a recipient who agrees not to disclose the information until broad non-exclusionary distribution is made or until a pre-established point in time.

An "embargo" is a type of confidentiality agreement. During the embargo, the recipient owes a duty of trust to the company and is considered a temporary insider.

D. Dissemination of Disclosure under Regulation FD

How can a company ensure that material nonpublic information that it wants to disclose is publicly available as required under Regulation FD?

Regulation FD requires companies to release material nonpublic information so that there is "broad, non-exclusionary distribution." A company can comply with this requirement in several ways:

• file or furnish a Form 8-K to the SEC - under either existing Item 5 or new Item 9, or through another timely SEC filing (The SEC stated that companies clearly have complied with Regulation FD if they use a Form 8-K. See more @ Should companies use a Form 8-K to publicly disseminate material information?);
• issue a press release through widely circulated news or wire services unless the company knows its press releases are not routinely carried (see more @ How can companies broadly disseminate information in a press release?); and
• disseminate through any other method that is reasonably designed to provide broad non-exclusionary distribution, such as Webcasts or telephonic conference calls in which investors generally can participate, provided that the public is given adequate notice of the conference time and medium.

In addition, the SEC stated that issuers may disseminate material nonpublic information by including that information in a document filed electronically with the SEC, such as a 10-Q or a proxy statement, within the time frame that Regulation FD requires, as long as such disclosure is conspicuous and not made in a piecemeal fashion. See more @ Can companies comply with Regulation FD by filing a document with the SEC other than a Form 8-K?

However, the SEC stressed that these methods cannot be used by themselves if they are not reasonably designed to reach a wide audience. For example, the SEC does not currently consider the posting of information on a company's Web site (as compared to a Webcast) to constitute broad dissemination of that information. See more @ Can a company meet its disclosure obligations by only posting information on its Web site? In other words, companies may need to use a combination of distribution methods.

Source: Rule 101(e) defines the types of public disclosure that satisfy Regulation FD. Telephone Interpretation No. 5 of the Fourth Supplement of the Manual of Publicly Available Telephone Interpretations .

What is "broad non-exclusionary distribution"?

The SEC does not require any particular method in which to broadly and non-exclusively distribute material nonpublic information. The SEC stated that issuers can choose their method or combination of methods as long as the method is “reasonably designed to effect broad pu